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Financial-sector reform is not enough

On September 14, the anniversary of the collapse of Lehman Brothers, US President Barack Obama made a speech on Wall Street promoting his reform of financial regulation.

“We will not go back to the days of reckless behaviour and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses,” Obama said.

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He responded to criticism that not much has changed since the beginning of the crisis. The financial sector remains inadequately regulated and no new rules have been introduced to stop the risky and greedy behaviour that led to the crisis. Obama said: “Those on Wall Street cannot resume taking risks without regard for consequences and expect that, next time, American taxpayers will be there to break their fall.”

The US President faces an uphill battle in his efforts to introduce financial reforms. He wants better oversight and tighter regulation of large financial firms. He also wants regulation of derivatives markets and larger reserves in financial institutions. These regulations will go a long way towards creating a safer US and global financial system. However, financial reform is not enough.

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The US has taken advantage of the role of the dollar as the global reserve currency. The dollar is a fiat currency and its strength is the result of US political, economic and military strength. The US has continued to run large budget and trade deficits because other countries would keep on buying US dollars and US treasury bills. Before the global financial crisis, there was much concern about the huge global imbalance.

The large budget and trade deficits of the US are still of concern. These deficits are still financed by trade surpluses and loans from countries such as China and Japan. Many countries are too scared to sell their dollars and their US debt because they fear huge losses if the dollar loses value owing to their actions. As a result, other countries have borne a large part of the cost of the subprime meltdown in the US and continue to face huge risks because of their continued ownership of US dollars and other assets.

Further, the impact on the global economy related to widespread financial liberalisation and the growth in the power of finance over the past three decades is not confined to the global financial crisis. The world has changed from one where financial institutions serviced the needs of the real economy to one where financial institutions own and manipulate the largest non- financial global corporations.

There has been huge concentration in global markets, driven by financial institutions that own shares in the largest nonfinancial global corporations. These global corporations have shifted production from developed to developing countries to take advantage of lower labour costs and environmental standards. They have taken control of developing-country mining and resource companies to secure lower input costs.

Over time, the financial institutions have become increasingly focused on short-term returns. Corporate executive remuneration, including share options, is now largely linked to short-term profits rather than long-term performance. As a result, over the past two decades, fixed investment levels have dropped in many developed and developing countries. A larger share of the profits of nonfinancial corporations has been taken by financial institutions instead of being directed into investment and employment.

There is much speculation about whether the global economy is recovering from the global financial crisis.

Unfortunately, there is very little attention paid to the financial and economic problems that have piled up over the past 30 years. Financial-sector reform is not enough. The power of finance in the global economy has to be controlled, harnessed and directed away from quick kills and bloated bonuses towards tackling poverty and promoting global prosperity.